The dazzling world of blockchain is fizzling among financial services organizations.

What are the main barriers to taking financial products and services based on blockchain technology into production?

Blockchain technology has been adapted and extended under several projects including Ethereum, Hyperledger, Quorum and Corda to meet various other needs of the financial services industry. Writers Don Tapscott and Alex Tapscott summarize the attraction of the technology in a Harvard Business Review article:

What is driving this deluge of money and interest [in blockchain]? Most firms cite opportunities to reduce friction and costs. After all, most financial intermediaries themselves rely on a dizzying, complex, and costly array of intermediaries to run their own operations.

Four opportunities

Perceived opportunities for blockchain use among financial services firms are almost limitless. Right now, we see four main areas of interest:

Rather than using a single centralized database - the model found in most banking systems - blockchain can also reduce fraud currently being perpetrated against sector firms - according to a PwC study, 45% of financial intermediaries suffer from cyberattacks every year.

Another key area of interest is smart contracts. Since blockchain can hold any kind of digital information, it can be used to create create contract execution workflows, such as delivery of goods prompting an invoice to be sent.

Know your customer (KYC) and anti money laundering (AML) projects could be the holy grail of blockchain, as it should reduce due diligence costs, currently running at up to $500 million a year at some instituations, according to a Thomson Reuters Survey - by identifying and verifying customers.

Holding back

While many banks are trialling blockchain projects, getting these initiatives into production is a different story, says Sam Penfield, advisory solutions architect at SAS. About half of the analytics firm’s clients are from the financial services sector.

It’s a little more involved than just getting a sample of data and running a trial. If you look at inner bank transactions or transfers for instance, you also have to look at the workflow and how they implement the blockchain in that internal context, as well as what they want to store in the blockchain. There are two pieces to it. It’s not about the data by itself, but a whole workflow of what are the use cases that you’re going to have, which will then define what the blockchain knows.

An example of use cases within the industry mentioned by Penfield include experiments around KYC by banks, whereby institutions may share parts of a blockchain with each other to keep track of suspicious clients, in situations where people hop from bank to bank in an attempt to open small accounts that fly under the catchment criteria for anti-money laundering regulations.

Banks update their records and then part of a blockchain is distributed amongst all of them to say that this person has already attempted this. But these are ideas that haven’t gone live yet. You can understand how a lot of this technology is very disruptive to the way banks do things today. [But] they have to re-engineer a lot of things to make it happen.

According to Penfield, another big problem for the industry when it comes to advancing in their blockchain initiatives is the lack of skilled professionals to work on projects.

We have local user groups for blockchain and there are a lot of people who are very interested and excited about that. But I think you’d be very hard-pressed to find somebody who knew how to, for example, code in Solidity, which is the language used in the main smart contract environment, Ethereum.

William Mougayar, a startup investor, advisor and author of The Business Blockchain is unequivocal about the human element of this equation as the main obstacle to advancement of blockchain adoption rather than the technology.

For banks, the challenges are less technical, and more fundamentally, business change related. Although most large banks are busy trying to figure out blockchain technology and its impact of their business, they are going to be limited by the pace and scope of change they can really absorb.

While all manner of improvements can be introduced with innovative uses of blockchain, Mougayar argues that banks are much more focused on streamlining their operations more than disrupting their own business.

[Innovations] are possible but they are not breakthrough implementations, because they will continue to tie back to a bank's existing business model, and affect their existing relationships.

Given all these hurdles to overcome, is there space for future innovation possibilities in a technology that doesn’t seem to have properly taken off? According to Mougayar, the answer does not lie within the established institutions.

The largest innovations in blockchain finance will not come from established institutions, but rather from the more nimble startups that are circling the space.

My take

Access to innovative technology in financial services has never been a problem. Alongside their own resources, banks often benefit from early adopter access to leading edge products and services for close to nothing, a distinct value to vendors seeking access to the large spending purse.

Re-tuning existing technology is complex, but those CIOs who are leading digital transformation initiatives have often told me how they managed to introduce new capabilities within their IT portfolios by using cloud computing and later integrating out with the existing technology stack. This follows a pattern we've seen in the broader world where new technology is adopted at departmental level to the point where it becomes pervasive.

On the other hand, it is likely that the problem around blockchain adoption is at least partly related to the difficulty in absorbing business change that Mougayar has described. Again, this follows patterns we've seen in the past.

While it is hard to believe, financial institutions are inherently risk avoiders and in a world where a lack of regulation that addresses modern technology it is a brave CEO who is prepared to pull the trigger on full production use.